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Chapter 06 Merchandising Activities Answer Key
True / False Questions
1.
Inventory is a relatively liquid asset and usually appears above Accounts Receivable on the
balance sheet.
2.
The operating cycle of a merchandising company consists of (1) purchases of
merchandise; (2) sales of the merchandise; and (3) collection of accounts receivable.
3.
The operating cycle of a merchandiser is longer and more complex than the operating
cycle of a manufacturer.
4.
Wholesalers buy from retailers and sell to the general public.
5.
Cost of goods sold is an expense shown separately from other expenses in an income
statement.
6.
If ending inventory and cost of goods sold are added together, they should equal gross
profit.
7.
If gross profit and cost of goods sold are added together, they should equal sales.
8.
General ledgers contain information about specific control accounts in the company's
subsidiary ledger.
9.
If a company has 240 credit customers, there are 480 individual customer accounts in the
accounts receivable subsidiary ledger (one for sales for each customer, one for receipts
from each customer).
10.
Inventory shrinkage refers to unrecorded decreases in inventory resulting from breakage,
theft, and shoplifting.
11.
In a perpetual inventory system, when merchandise is purchased, it is debited to an
account called Purchases.
12.
A perpetual inventory system requires the capability of recording the cost of the goods
sold for individual sales transaction.
13.
When using a perpetual inventory system, the Inventory account is credited when a sale is
made.
14.
In a perpetual inventory system, the Inventory and Cost of Goods Sold accounts are kept
up-to-date throughout the accounting period.
15.
When an adjusting entry is made to record inventory shrinkage, the Inventory account is
debited and the Cost of Goods Sold account is credited.
16.
In a periodic inventory system, the Inventory and Cost of Goods Sold accounts are kept
up-to-date throughout the accounting period.
17.
In a periodic inventory system, when a sale is made there is no entry made to record the
cost of goods sold.
18.
In a periodic inventory system, a complete physical inventory must be taken at year-end in
order to compute the amount of purchases made during the period.
19.
In a periodic inventory system, cost of goods sold is the cost of goods available for sale
less ending inventory.
20.
In a periodic inventory system, the Cost of Goods Sold account may be created during the
closing process by debiting Cost of Goods Sold and crediting the Beginning Inventory and
the Purchases account.
21.
Under the periodic inventory system, no effort is made to keep up-to-date records of
either Inventory or Cost of Goods Sold as transactions occur.
22.
In a periodic inventory system, the ending inventory can be determined from the
accounting records, and a physical count of the merchandise on hand will confirm the
amount.
23.
In a periodic inventory system, the cost of goods sold is determined by the following end-
of-period computation: Beginning Inventory + Purchases - Ending inventory = Cost of
Goods Sold.
24.
A large company with many different kinds of low-cost items would tend to use a
perpetual inventory system.
25.
Today, most large merchandising companies use a perpetual inventory system.
26.
A factor that might suggest that a periodic inventory system is appropriate is that all
merchandise is stored at the sales site.
27.
A factor that might suggest that a perpetual inventory system is appropriate is that
inventory includes many different kinds of low-cost items.
28.
Net Sales is computed as total sales revenue less sales returns and allowances less sales
discounts.
29.
If a transaction takes place with terms 2/10, n/30, the "10" refers to the percent discount
a purchaser can take if payment is made within 2 days.
30.
The terms "sales discount" "purchase discount" and "cash discount" all refer to the same
discount.
31.
If a company records a purchase at the net cost and then fails to take advantage of the
discount, the discount not taken is recorded in the Interest Expense account.
32.
If a company records a purchase at the gross invoice price and then takes advantage of
the discount, the discount is treated as a reduction in the cost of goods sold.
33.
Sales returns and allowances is an expense account, and on the income statement it is
added to cost of goods sold.
34.
Instead of paying for merchandise purchased on account, Olympic Corp. returned this
merchandise to the supplier. Olympic should record this transaction by debiting Accounts
Payable and crediting Sales Returns and Allowances.
35.
Purchase Discounts Lost is shown as a reduction of cost of goods sold in the income
statement.
36.
The contra-revenue accounts, Sales Returns and Allowances and Sales Discounts, should
be closed by crediting these accounts and debiting Income Summary for each account.
37.
In a retail department store with an efficient perpetual inventory system, the quantities of
goods actually on hand are probably somewhat more than the quantities indicated in the
accounting records.
38.
In preparing monthly bills to be sent to individual credit customers, the billing department
will use the accounts payable subsidiary ledger, rather than the general ledger.
39.
Regardless of the number of special journals used, every business needs a general
journal.
40.
Gross profit margin is the dollar amount of gross profit expressed as a percentage of gross
sales.
41.
The average gross profit margin is a measure of relative profitability.
Multiple Choice Questions
42.
The operating cycle:
43.
Which of the following businesses is likely to have the shortest operating cycle?
44.
Merchandising companies:
45.
Sales revenue is recognized in the period in which:
46.
Gross profit is the difference between:
47.
The basic purpose of a subsidiary ledger is to:
48.
Parkside Pool reports net sales of $625,000, gross profit of $275,000, and net income of
$15,000. The company's cost of goods sold is:
49.
Berg Tooling reports net sales of $325,000, gross profit of $175,000, and net income of
$15,000. The company's cost of goods sold is:
